JM Financial: Globus Spirits Ltd: A walkthrough

Globus Spirits Ltd: A walkthrough
 360 degree presence, interesting opportunity: Globus Spirits (GBSL IN) is
predominantly a North India centric liquor company with a 360 degree
presence across the sector and is involved in: (a) manufacturing, marketing
and sale of liquor, and (b) dealing in country liquor, IMFL, industrial alcohol
and also does contract bottling for renowned Indian branded players. The
company’s business model appears interesting, given that: (a) Country liquor
in existing pockets is unlikely to lose relevance in the near-term, considering
the duty-led price gap between it and IMFL (details inside), (b) Globus is
looking at increasing its presence in the IMFL space; its existing network and
relationship in the industry will aid the initial transformation, in our view.
 FY06-10 revenue, EBITDA and adjusted profit CAGR of 32%, 44% and 42%:
Globus had raised `750mn through an IPO in Sep’09 (at `100/share). Its FY10
net sales, EBITDA and adjusted profit were `2650mn, `367mn and `211mn
respectively; revenue included 42%, 32%, 13% and 7% share from country
liquor, franchisee IMFL business, industrial alcohol and IMFL branded
business respectively. See inside for description of each business segment.
Globus’ management expects to clock a c.30% net sales growth in FY11 with
EBITDA margin at c.15% level. As per management, growth in the 30%-range
is achievable over the next 2-3 years, based on which the stock at current
market price appears to be trading at a forward PE of sub-10x.
 Growth drivers: Enhanced IMFL presence, capacity expansion: (a) Though
country liquor accounted for a sizeable chunk of Globus’ revenue (42% in
FY10), the company’s current focus is to enhance presence in the fastergrowing
higher-margin IMFL category. Globus recently launched ‘County Club’
in the regular whisky segment (Jul’10), targeted at the Northern markets
(Haryana, Rajasthan, Punjab, Himachal, UP) and is planning a brandy launch
(semi-premium category) in the Southern markets. The company is targeting
1mn cases of IMFL volume in FY11 (FY10: 0.26mn), (b) Globus is currently
also on the look-out for opportunities for registering with the Canteen Stores
Department (CSD), which is the nodal purchase agency for the Indian Army
and is the largest institutional buyer of alcoholic beverages in the country, (c)
Globus is currently expanding its alcohol manufacturing capacity (28.8mn BL
p.a. to 70mn - expected to be fully operational by Dec’10). Alongside higher
volumes, commissioning of the new capacity would also lead to substantial
savings in power costs and reduce wastage as it eliminates the intermittent
process of separately making rectified spirits and produces ENA directly.
 Country liquor unlikely to lose relevance in existing pockets: Country
liquor commands the largest volume share in the Indian alcohol segment and
accounts for the biggest chunk of revenue for Globus (42% in FY10). As per
management, higher IMFL growth notwithstanding, country liquor is unlikely
to lose significance, given the huge retail price differential between it and
IMFL. Significant part of the price differential is on account of a steeper
statutory levy on IMFL, implying that it is difficult for IMFL players to narrow
the price-gap. Typical country liquor consumers include agri-workers in rural
India, construction and industrial workers in towns/cities etc, and hence,
pricing plays a crucial role. Management is exploring opportunities for
geographic expansion to achieve a higher growth rate. However, given the
requirement of setting up manufacturing facilities in each state of operation,
funding tie-up for expansion would be critical.